Estate of Cohen v. Booth Computers, 2011 WL 2694288 (N.J. Super)(July 13, 2011)
A father created an income-producing partnership on behalf of his three grown children, funded in part with Palm Beach property originally purchased for $750,000. In keeping with its closely held nature, the partnership agreement provided that, on a partner’s divorce or death, the remaining partners “shall” repurchase the divorced/deceased partner’s shares at the “true value” of the partnership, defined as “net book value” based on the most recent financial statement, plus $50,000.
In 1997, one of the partners died, and the partnership paid the estate $97,650 for the decedent’s interest, based on the buyout provision. By the time one of the two remaining partners died in 2007, the oceanfront property had appreciated to $45 million. An appraiser for the deceased partner’s estate estimated the “full” or fair market value of the partnership at just over $23 million, based on the net asset approach, which, when added to the appraised value of all the partnership’s properties, exceeded $68 million.
Nevertheless, the partnership paid the deceased partner’s estate just over $177,800, based on the buyout provision and the financial information as of the date of death. The estate sued the partnership, requesting specific performance of the buyout provision at its “true value” of $68 million. Given the gross disparity between fair market value and net book value, any other interpretation was unconscionable and voided the buy-sell provision, the plaintiffs said.
At trial, the partnership presented a CPA expert, who concluded that the purchase price of $177,800 accurately reflected the partnership’s book value. Moreover, the partnership’s books shouldn’t have reflected the fair market value of the Palm Beach property, the CPA expert explained, because the tax code and generally accepted accounting principles require investment property to be recorded at cost.
The trial court agreed, finding that the partnership had always booked its assets at cost rather than market value. This historic treatment comported with the “plain language” of the partnership agreement, which clearly pegged the buy-out price to book value (as it did when one partner died in 1997). Under these facts, there was nothing “inherently offensive” in the buyout formula, the trial court held, and the estate appealed.
“We recognize the disparity between net book value and fair market value,” the appellate court observed, yet the disparity, alone, was not was not sufficient to “shock the judicial conscious.” The controlling factor is the language of the partnership agreement, which in this case was clear and comported with standard definitions of book value, the court held, and affirmed the buyout at net book value.
